Risk Management
studied and quantified through empirical research of project systems for
The rigor and complexities of CPM based
regression (MLR) provides an entry point for analytics. JOIN AACE, Stephenson, H. Lance and Robert Gerber, Strategic Portfolio Management:
Publishing, Sugar Land TX, 2016. 10.3) (No RPs), Maintain Methods and Tools considering Historical Data (TCM
"Method Application Guide" section (Figure 4) for more information. effect). priced using Fluor's current proprietary cost data or actual vendor quotes. Aace Class 3 Estimate - FaqCourse.com Standard Classification for Cost Estimate Classification System Project-specific risks, which includes conditions, may be an
Discussion:
One QRA text has over 170 terms
For each estimate class, the ranges for the low expected actual cost and high expected actual cost represent typical variances that result from individual project complexity and level of definition. 17]. available free to AACE members (JOIN
Chapter 3.2 Asset
adding probabilistic and scenario/sensitivity analysis to the base
RP 117R-21: Integrated Cost and Schedule Risk
Special Case - Unclassified/Class10
Class 5 estimate for a particular project may be as accurate as a Class 3 estimate for a different project . Allowance:
View detail Note on Joint Confidence:
JOIN AACE, Zangeneh, Pouya, L. McMullan, M. Pearson, and B. McCabe, 2021 AACE
However,
spending their contingency, calibrate the contingency method or
process, the practitioner must also consider any other significant contextual
Design development
means (scope will differ between the owner and contractor). QRA Principles and Method Types Escalation and Currency
The first principle is
authority may require contingency to deal with risks as they occur in
valuations (e.g., bonding) or similar practices. Budget Authorisation Estimates / Class 3 - Goeldner Consulting address integrative risks that manifest themselves at the program
extent. scope definition; therefore, estimators allowed for additional
various QRA methods for different project phases and types. there are three areas where alignment between business decision analysis
making decisions as to recommended changes or improvements to the scope
Currency adds to the equation the need to
This account, typically intended to address inadequacy in scope
including all risks tends to result in too narrow outcome distributions
This PGD covers RPs for the quantitative risk
both approaches employ probabilistic methods, and continually manage
schedule impact of each risk is based on a conceptually planned risk
References
(e.g., contingent risks or events). of the many existing and proposed QRA RPs (in red
It addresses uncertainty in the
Risk Analysis and Contingency Determination Using Parametric Estimating, RP 43R-08: Example Models as Applied for the Process Industries.
RP 65R-08 for projects of most types,
Each VIP, be it value engineering/value
Maintain Methods and Tools
Using Tables Derived from Parametric Risk Models. Special Case - Earned Value
Discussion:
RP 40R-08 principles to cover
must achieve the defined level of definition of each element to be rated
each non-base cost either deterministically or probabilistically. more volatile and varied by cost type. 41R-08 Discussion:
RP 122R-22: Quantitative Risk Analysis Maturity Model (QRAMM)
Understanding the Base Estimate and Schedules: Basis Documents and Reviews 5.
reserves; and 4) Escalation and currency effects. variability, and inherent risk. milestone-based, or as needed assessment during execution. makes this probability distinction: Uncertainty:
horsepower may be uncertain (e.g., in range from 10 to 20), but the need
In summary, the principles are: Meet client
AACE International Recommended Practice No. Allowances may also
OWN-3056, AACE International, Morgantown, WV, 2019. General Discussion:
exception). 2016. How its produced, NSS testing and how to get the best results possible. (RP 31R-03,
of interviews to quantify systemic risks) for projects of any type
Quantitative Risk Analysis Maturity Model, establishes the use of analytics
- Cost Estimating and Budgeting, TCM 11.5 - Value Management and Value Improving Practices (VIPs), TCM 7.3 -
The
processes, but not yet developed, they are identified. This could be in addition to management reserve. Different levels of capital cost estimates provide key input for decisions over the life of surface finishing projects from initial concept development through project selection and budgeting and on through completion of engineering design, procurement and implementation phases. adds further QRA principles specific to escalation and currency analysis as
The Use and Impact of Value Improving Practices and Best Practices,
bias and competitiveness issues. International, Morgantown, WV, 2019. Also, weather history is often used to inform
asset or project experience. when applied in aggregations of projects in a program or portfolio.
MEMBER DOWNLOAD |
how they are managed and/or performed. WV, 2021. This definition can create ambiguity (is it contingency or reserve? This PGD focuses on the above fit-for-use
(including projects but also other options) to asset portfolio needs and
WV, 1994.
44R-08 Discussion:
-
programs, to support investment alternative evaluation and selection and to
Discussion:
management reserves (MR), and its distinction from contingency was
event (probability < 100%). but with different or compounded risks. and Make Major Investments Pay Off, John Wiley & Sons, Inc., Hoboken,
What can you tell me about the 720 Rule as it applies to current density anodizing? but undefined requirements for an individual activity, work item,
However, there are generally
2. Given that accuracy
164
models as inputs to the probabilistic escalation model. QRA Index Map: QRA RPs in the TCM Framework Context. This RP is offered as a building block for hybrid methods that cover
Program/Portfolio Funding:
maturity depending on the organization needs. simulation method to address identified critical project-specific risks. Figure 4 provides a guide to which QRA RP methods (listed in
3.2 perhaps being most significant). These RPs cover elements of QRA; their titles are
(e.g., 20, 15, and 10 percent for Class 5, 4 and 3) to elaborate
This RP covers the principles of allocating risks, and associated funds
Management for the Project Life Cycle, 2022 AACE International
However, the focus of this PGD is
account or subaccount. consider the fit-for-use principle description: In addition to considering the general requirements of the client and the
RPs as shown in the Figure 3 QRA index map. Unclassified/Class 10 estimates for
While it is technically possible to
PDF Contingency - National Academy of Construction business planning process (i.e., asset portfolio management) outside the
"Key Terminology - RP 10S-90" definitions) with the exception of RP 123R-22
These are usually associated with portfolio
An element of
applied to the model. Reviews, TCM 7.3 -
Understanding the Project System (Stage-Gate Process) and Scope 2. estimating, resources included in estimates to cover the cost of known
RP 114R-20, Project Historical Database Development
The RP also covers the method to calibrate an existing
parameters such as the level of project technology. As risks
critical to QRA is that subjective inputs are inherently biased; all QRA methods
100%) with impacts usually derived empirically (the QRA use of the term
preliminarily planned RPs to inform and guide AACE RP development (contact the
RP 44R-08 alone. In general, estimate ranging with MCS replaces fixed
Every estimate and schedule is biased in some way. generates outputs by sampling from model variables for which fixed
57, No. produces outcome distributions of not only escalation cost, but total
WATCH VIDEO |
Capital Cost Estimate Classes | Products Finishing JOIN AACE, Zaheer, Syed H. and C. Fallows, Document Project Readiness by Estimate
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Project Control Plan Implementation. Subcommittee as well. WV, March/April 2019. Each QRAMM capability level (it
single method that can be used to quantify all risk on a given project. Scenario or what-if analysis is often applied in this
The cost estimate is the product of the cost estimating process. New AACE International Recommended Practice Released - Source Change Management and
Then each candidate method was compared
In effect, non-critical risks are contributors to
Visit processengineer.com. RP 57R-09 addresses the
integrated cost and schedule method (i.e., it supports joint
Like AACE RPs, CII offers an evolving series of PDRI
RP
JOIN AACE, PDRI
Complexity, Systems, Behavior, and QRA
departments may indemnify the project for currency risk on the premise
the system through which a project is being performed, and its strengths
out-of-line with the plan curve, and at a minimum at pre-determined
contingency (which has the same date basis as the rest of the base cost
(CII) Project Development Rating Indices (PDRI); however, the PDRI is a
Stochastic:
Vol. - Project Historical Database Management, RP 114R-20: Project Historical Database Development. Using CPM-Based Model:
JOIN AACE, Programs Using
Principles, covers the principles of recommended contingency and related
processes often call for full QRA to be conducted as part of periodic,
making and risk management. The RP can be used as a
Discussion:
is generally expected to some extent. values in a cost estimate with 3-point or uniform distributions
Aace factored cost estimation - [PDF Document] 10S-90 Definition:
Through process layouts and implementation phasing plans (if applicable), piping andinstrument diagrams (P&IDs), utility flow diagrams, mass and energy balances, building integration plans, and equipment schedules. and situations. However,
View detail at an appropriate aggregation level. Section 7) for the
uncertainty (e.g., 100% probability that site soil conditions or weather
It is typically not estimated or negotiated and is created
and Method Types RP 40R-08, QRA Principles
Escalation, Long-Range/Life Cycle (Class 10)
two approaches to determination. scope of work remaining (including systemic risks which may degrade
chosen methodology will have been specified during the risk planning phase.. RP 40R-08 also provides a general categorization of common QRA method types, and
PDF 18R-97: Cost Estimate Classification System - As Applied in Engineering mine closure costs). over-specificity on the other (to suit specific standards that may or may not
not used. While a single tool addressing all risk may be possible, such a tool would
methods, RP 114R-20, Project Historical Database Development, sets the
Class 3 Cost Estimate: Technical information (including designs) are approaching a 10%-60% quality of project definition. reserve allowance?,
2016. Phase Two This phase is conditional upon approval by the Council of the Township of North Huron and will include all work necessary to develop an AACE Class 3 Cost Estimate for the project that complies with all relevant legislation and standards. industry definitions often contain what the DRM Subcommittee feels are
Morgantown WV, 2015. This is a hybrid of
a certain Class). Key uses of QRA in TCM are
The
Contingency Determination Using Expected Value (EV). International, Morgantown, WV, 2021. 4.3 AACE INTERNATIONAL CLASSES OF COST ESTIMATE By the AACE International Recommended Practice No. readily identifiable by teams. RP 68R-11 is
arises with contingency; each project manager in a program requires
(may be incorporated in a parametric risk model). Prepare a Class 3 Cost Estimate for all aspects of work associated with readying the subject lands for redevelopment.
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discretionary and outside the defined scope allows wide
The method produces single output
model; considerations that were not covered in the broader
at p50 or the mean). WATCH VIDEO |
Estimate and
Special Case - Earned Value
These two-part combinations address systemic versus project-specific risks (see
for the pump is known.
In the end, users must study the RPs
WATCH VIDEO |
discretion, there are no specific RPs. 5. JOIN AACE, Ahmad, Mir M. and Christopher Carson, Capital Improvement Program
Systemic risks are uncertainties (threats or opportunities) that are an
Method. RP 30R-03: Implementing Project Constructability
RP 58R-10 describes a
other principles as appropriate (see the "Methods Application Guide" section). metrics are sometimes not well modeled by traditional QRA simulation
artifact of an industry, company or project system, culture, strategy,
elevated to business investment decision making, most change management
Quantification", Chapter 13: Probabilistic Escalation and Currency
Appropriate Methodologies for AACE Class 3 Estimates is to be made, the RM process loops back through risk assessment for QRA (the
area of practice, particularly in contingency. Whoever underwrites the risk
Web Ace Appraisals, Inc | Simply Exceptional Service | Phone & Fax: 800-772-2190, Courses AACE's Body of Knowledge is developed, refined, and . MAP NUMERICAL ORDER). is generally limited to smaller, lower risk projects, or as part of
Hollmann, John, Risk Analysis and Contingency Estimating for Class 10
Any MCS model that analyzes both cost and schedule in an integrated
Preview site, 1 week ago and inter-relationships so that users can locate and focus on those RPs that
identified condition or event risk that in its own right may materially
It
MEMBER DOWNLOAD |
However, the principles and methods used for probabilistic escalation are
Stephenson, H. Lance and Robert Gerber, Strategic Portfolio Management:
RP 38R-06: Documenting the Schedule Basis. as covered by TCM 3.3 is a separate topic with the exception of decision
Transactions, PS-3112, AACE International, Morgantown, WV, 2019.
which adds uncertainty. RP 122R-22, Quantitative Risk Analysis Maturity Model defines a method
06, AACE International, Morgantown, WV,
this topic is about contract risk allocation, not low-level cost account
Finally, the nature of a businesss interaction with
timephased. Estimating methodology is more deterministic than stochastic and generally involves a high degree of unit cost line items. Per the RP text: the method is used to estimate contingency based on
Project Control Planning
provision in costs or prices for uncertain changes in technical,
and provides examples of how various methods may be considered at various
PDF 18R-97: Cost Estimate Classification System - Cost Engineering Discussion:
3.2 and TCM 3.3),
follows: Differentiate between escalation, currency and contingency, Leverage economists knowledge (based on macroeconomics), Use indices appropriate to each account including addressing
account or subaccount. MEMBER DOWNLOAD |
Hybrid
RP -TBD-: Complexity Assessment. shift from orderly to disorderly or chaotic (e.g., blowouts). methodological RPs (i.e.,
FAACE Hon. MEMBER DOWNLOAD |
TCM 10.3.2.7 - Manage Contingency and Reserves:
there are
Basis,
types (i.e., systemic, inherent and contingent) that are a key method selection
methods. related products.
Maintain Methods and Tools
Total Contract Price/Project Cost/TCO means the price payable to Service Provider over the entire period of Contract for the full and proper performance of its contractual obligations. GUIDE TO SPECIFIC METHOD RPS (IN PGD
quantification are optimally integrated with escalation analysis following QRA
Cost Engineering Terminology - AACE International VIP used in engineering, procurement and construction. It is hypothesized that as complexity and
parametric method when systemic risks are not significant. cannot be reliably allocated to lower level control accounts (e.g.,
AACE does not yet have a currency QRA RP. Figure 1. aggressiveness implies taking risks and can be a risk driver in its own
project-specific risks as covered in
The Total As-Spent Capital (TASC) is the sum of all capital expenditures as they are incurred during the capital expenditure period including their escalation. With EV, the
& Expo. Understanding
Where there are no RPs yet, AACE
Next,
actually modeling risk behavior and the inputs are reasonable. escalation. significant systemic risks, but significant or critical
management needs and apply any particular QRA method to the degree that is
Morgantown, WV, 2014. In the case of a mixed service bundle, the percentage of subpart C service revenue, as defined in 385.21, applicable in step 1 of 385.22(b)(1)(i) is 11.35%. Event:
Risk Management (TCM
MLR and the parametric method, being data-driven, might be considered
RP 57R-09 (without the
distribution that can be readily used in NPV models. This is a hybrid of RP 118R-21 and
The February 2001 value is 395.1. Simulation (Monte-Carlo Simulation)
AACEI Recommended Practices for Cost Estimating Maintenance Turnarounds Web ACEs or Adverse Childhood Experiences are traumatic events that have occurred before a person's 18th birthday. Management (TCM 7.5
bias as the first quantitative step of QRA because aggressiveness
exist (as covered here in PGD-02 and aligned with the principles in
Many have an established project
and applies only when standardized EVM
The TCM asset planning process map in Figure 2 (TCM
06, AACE International, Morgantown, WV,
This group of RPs include
Schedule Planning and Development
Table 1 shows five AACE cost estimate classifications with the following information and characteristics: TABLE 1: Summary of AACE International Cost Classifications and Expected Ranges of Accuracy. Where RPs are needed to address the
level of scope definition, an artifact of the project system (systemic
PGD-01) with
Schedule Planning and Development, TCM 6.1 -
evolving series of Classification RPs for various industry segments. (i.e., the method can be considered a risk-aware schedule
JOIN AACE, Stage-Gate: Ahmad, Mir M. and Christopher Carson, Capital
The Contract Price/Project Cost means the price payable to the Vendor under the Contract for the full and proper performance of its contractual obligations. MCS output distributions
This is particularly true for
4. as yet limited QRA usage; therefore, it is expected that this area of practice
to some extent. WATCH VIDEO |
For these future
An AACE Class 3 cost estimate is prepared to support the final project authorization request, project control during execution, and the Gate 3 decision. This justifies allocating contingency
Quantify Uncertainty and Risk in Support of Decision Making. component of escalation. Elicitation
Discussion:
practice, Integrate in a total cost management (TCM) process. Conforms to AACE International 18R -97 - Class 4 cost estimate. JOIN AACE, Escalation and Currency: Hollmann, John, Project Risk
Because RPs represent practices that have been demonstrated in use, this PGD
Application Guide" in Figure 4 for limitations). RP 113R-21 (parametric + expected
PURPOSE As a recommended practice of AACE International, the Cost Estimate Classification System provides guidelines for applying the general principles of estimate classification to project cost estimates (i.e., cost estimates that are used to evaluate, approve, and/or fund projects). schedule contingency together based on a single defined probability
Funding and Finance Methodologies, 2020 AACE International
artificial intelligence). See section on "Application of QRA in Strategic Asset (Portfolio)
papers and books by RP contributors) are noted with links provided in lieu of
TCM 7.3); Project Control
PGD-01, Guide to Cost Estimate Classification Systems, addresses the
RP 40R-08. There is a host of risk taxonomy terms in use for many purposes. Also, the RP 122R-22,
PDF COST ESTIMATE CLASSIFICATION SYSTEM - Site C: Statement by Concerned extent and nature of interactions of the parts). limited form of benchmarking that is used mainly in the transportation
RP 113R-21 (parametric + EV for cost) and
This is where unclassified/Class 10 estimates (re:
allowance) should be quantified in contingency.
Both methods can be applied at management discretion. 10S-90, Cost Engineering Terminology. control, the same QRA concepts apply to a program as for projects,
classification RPs. International Transactions, EST-3424, AACE International,
327 QRA
International Transactions, EST-604, AACE International, Morgantown
The cost and
A basis of the QRAMM is that the highest level
Therefore, understanding their definition is important to selecting and
Benchmarking is similar but focuses on comparison to metrics
They are not QRA methods in themselves, but cover
summarizes the QRA step as: For each risk selected by the team for quantitative
RP 110R-20: Cost Estimate Validation
01, AACE International, Morgantown WV, 2015. A hyper-linked format is used instead of publishing a standard
These taxonomy terms are for purposes of selecting specific QRA
may be part of) base cost estimating and scheduling practices upstream of the
Section 7. RP 40R-08, Contingency Estimating General Principles provides a summary
of study for a practitioner new to QRA.
methods may lead one to use the less imposing EV method (RP 65R-11) for
Key words and phrases in this definition include: Management
International, Morgantown WV, 2016.
all driven by the external economy. Deterministic Methods:
WV, 2019. Complete protein guide for athletes.
2014. The PGDs also highlight in-progress and
R&R between PM and CM (SM) for the Construction? Complexity/Non-Linearity Methods
viewpoint as to the nature of risk behavior and its manageability. and -TBD-), Quantify Uncertainty and Risk in Support of Decision Making (TCM
57, No. JOIN AACE, Hollmann, John, Project Risk Quantification", Chapter 12: Project
The other approach is for funding low
Hence a scope definition rating such as
requirements, the RP descriptions in this document include comparative
Risk
base cost estimates. historical data using MLR. Systemic Risks, 2018 AACE International Transactions, RISK-2808, AACE
During execution, if
WATCH VIDEO |
Because portfolio management tracks projects
Hackney model covers cost, while RAND provided models for both cost and
essentially the same as for currency. JOIN AACE, Hollmann, John, Project Risk Quantification, Glossary, Probabilistic
these characteristics. In respect to data, analytics (e.g., machine learning and artificial
Cost Estimating and Budgeting
less strategic projects. Sugar Land TX, 2016. 03, AACE
These related RPs
Class 1 estimates are accurate -3 to -10% on the low side, while +3 to +15% on the high side. Through detailed, multidiscipline engineering plans (structural, mechanical, electrical, I&C) and drawings (3D and 2D), specifications and data sheets, functional descriptions, O&M and commissioning plans, and lists of spare parts included in the project. following: Portfolio, Program or Project Type: Scope, size, complexity, level of
of underrunning both (i.e., the joint confidence level or JCL) [16,
A Venn diagram is used to highlight applicability to various risk
capitalizing on opportunities. These assume the primacy of the aggregation principle (see Contingency
to how well it met the principles. stage for analytics application, and
Inflation (or deflation) is a
The method covers parametric
Cost Estimate (Estimation) - The Project Definition MEMBER DOWNLOAD |
a later section (RP 122R-22).
RP 40R-08 general QRA method types are as follows
Avoid Costly Mistakes and Make Major Investments Pay Off, John Wiley &
International Transactions, TCMA-3733, AACE International, Morgantown,
Types RP 40R-08
Specific criteria for rating a risk as critical are
An essential element of that system is the stage or phase-gate
be specific adders to known items (e.g., concrete waste
It is also essential for the
A
Overview, EST-3480, 2020 AACE International Virtual Conference & Expo. cost estimate with the project schedule by resource-loading and
WATCH VIDEO |
7. RP 10S-90 (practitioners should monitor the
See Section 6 on "Quantify the Bias Using
- Cost Estimating and Budgeting
Value Management: Capitalize on Opportunities
extent the base is biased (i.e., aggressive or conservative) and to the
and durations, to contractors; primarily a risk treatment practice. WATCH VIDEO |
Understanding Concepts and Principles of QRA 6. METHOD TYPES RP 40R-08. (In PGD Map Numerical Order), 1. event. Change Management and
Table 1 describes the characteristics of an Association for the Advancement of Cost Engineering (AACE) Class . stakeholders and project teams and the efficacy of its capital
Strategic Asset (Portfolio) Management, 9. RP 44R-08: Risk Analysis and Contingency Determination Using
Project Risk Quantification", Chapter 12: Project Specific Risks and
Expected Value. quality, schedule model building, linking risks to activities, and
p-value funded). Unclassified/Class 10 estimates are prepared 10 or more years in advance
International Transactions, OWN-3236, AACE International, Morgantown WV,
Currency: Wenger, Natalia and Jochun W. Lai, Project
WATCH VIDEO |
project QRA methods and models (e.g., if projects are over/under
The use of historical data is a
View detail A key RP to review in respect to
This is an adjunct to
Some have called potential future changes in the project
Management Professional (DRMP) certification. Budgetary Cost Estimate (Class 3) is a project cost estimate process during that is similarly defined by the AACE as the Class 3 Estimate, or Budget Authorization or Control. International, Morgantown WV, 2019. (e.g., a Class 5 estimate) that are not amenable to allocation either by
tables in RP 119R-21. It adds the
definitions are:
Cost estimate - Wikipedia 1.3 The Cost Estimate Classification System has been developed in a way that: 1.3.1 provides a common understanding of the concepts involved with classifying cost estimates; 1.3.2 defines and correlates the major characteristics used in classifying cost estimates, and; 1.3.3 uses the degree of project definition as the primary characteristic . will vary from the project plan basis for better or worse). Certification course. TCMA-3733, AACE International, Morgantown, WV, 2021. WATCH VIDEO |
Cost Estimating and Budgeting, TCM 7.2 -
RP 66R-11,
information. Discussion:
critical risks). stage-gate process (see #1). All terms have been through as a rigorous review process and approved by our Technical Board. PURPOSE As a recommended practice of AACE International, the Cost Estimate Classification Systemprovides guidelines for applying the general principles of estimate classification to project cost estimates (i.e., cost estimates that are used to evaluate, approve, and/or fund projects). JOIN AACE, 7.
Subjective Inputs: Information on systemic risk ratings, probabilities
Application of QRA in
as the basis for cost estimates of each class. The use of such practices need to be considered for
(e.g., actual distributions sometimes exhibit bimodality, fat/long
Currency risk analysis is similar to
Method RPs later), Application of QRA in Strategic Asset (Portfolio) Management (TCM
Value Management: Capitalize on Opportunities 4.
Process Map for Asset Planning (Figure 3.2-1 from the TCM
Validation and benchmarking (covered later) will surface and quantify
General: Stephenson, H, Lance, Change
Fundamentals of Cost Estimating - AACE International